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TMI Blog1995 (2) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... hi The second respondent is a person who was proposed for election as a director of the first respondent in the annual general body meeting to be fixed on 4-8-1994. Item Nos. 7 and 8 in the notice have been proposed as 'special business'. 3. Along with the suit, the applicants have filed OA No. 708 of 1994 for the grant of interim injunction restraining the respondents in any manner considering the subjects, viz., Item Nos. 7 and 8 of the notice dated 29-6-1994 issued by the first respondent. On 3-8-1994 the injunction application was moved before me. The first respondent's counsel took notice and submitted that the meeting as proposed could go on including the special business, viz., Item Nos. 7 and 8 of the agenda but the first respondent would not give effect to the same until further orders if carried on in the said annual general meeting. On the same day, I passed an order. Instead of granting injunction, I allowed the first respondent to proceed with the annual general meeting with the agenda already printed and circulated to all the shareholders. I made it clear that any decision taken regarding item Nos. 7 and 8, if carried on, will not be given effect to until fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst respondent stating that the contention of the first respondent was wrong. He also accused the first respondent of negligence in not verifying the provisions of section 257 before announcing his candidature. He had further stated that he was entitled to seek re-election and in support of this contention he mentioned that on an earlier occasion when a director was co-opted in a casual vacancy, the said person was not called upon to remit the sum of Rs. 500. Mohanakrishnan also tendered a demand draft for Rs. 500. The first respondent by its letter dated 10-9-1991 rejected the contention of Mohanakrishnan and returned the draft sent by him, as, according to the first respondent, the tender was in violation of the provisions of the Act. It also appears that the said Mohanakrishnan did not pursue the matter further. 6. In the annual general meeting held on 21-6-1993, the second respondent was treated as a retiring director and he was said to have been re- elected. By letter dated 30-12-1993 the first applicant enquired whether the second respondent had remitted a sum of Rs. 500 when he sought election and mentioned that if he had not deposited the amount towards his appointment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause of the non-compliance of section 257 and that the first respondent has not adopted a different stand against the second respondent. The second respondent was appointed as a director in the casual vacancy and he was treated as a retiring director and he was re-elected on 4-9-1990. ( d )The shareholders of the first respondent thought it fit to reappoint the second respondent unanimously and again his term for reappointment came up for consideration at the annual general meeting held on 21-6-1995. The applicants, who were the shareholders even at the relevant point of time, did not choose to object to such appointment or bring to the notice of the first respondent that the first respondent has not followed the procedure under section 257. ( e )The first applicant is the father-in-law of one S.R. Kishore, who was an employee of the first respondent, and the third applicant is the brother of S.R. Kishore. The said S.R. Kishore was suspended and later dismissed for the misconduct arising out of the misappropriation of the funds of the first respondent. The matter is sub judice as S.R. Kishore has taken the matter to the Labour Court and the matter is pending disposal. The fat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery easily understood from the fact that the minutes itself states that the number of shareholders present were only 1,411. Paragraph 25 of the counter-affidavit states that 244 shareholders took part in the poll. However, the result of the poll mentioned states that Manavalan had Fetched a vote of 7,392 votes. There is no mention about any proxy at all in the minutes of the meeting. In the circumstances it is not clear as to how only with 1,411 shareholders, there could be a possibility of 7,392 votes being polled and when the minutes itself does not say anything about proxies. It is cardinal principle of the meetings that if proxies were received by the company, there should be verification of the proxies and there should be an announcement about the number of proxies received which are valid. No such statement has been made. The conclusion is that the company had not received any proxies. In the circumstances, it is impossible for Manavalan to get 7,392 votes unless the minutes themselves are concocted and fabricated." 9, On the above pleadings Mr. C. Harikrishnan, learned counsel for the appellants, argued three points. They are: ( a )The explanatory statement for item No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and experience in nidhi matters. No particulars of any expertise or experience have been set out. ( b )The second respondent was allowed to continue as a director not withstanding the defect in the appointment and notwithstanding the fact that the company knew the defect in his appointment but on the other hand, in the case of Mohanakrishnan prompt action was taken about the defect even at the time of his candidature. The company was informed about the defect in the appointment of the second respondent by the first applicant's letter dated 9-9-1991. These facts ought to have been disclosed. ( c )So far as the second respondent was concerned, the first applicant, had raised the objection in his being appointed as an additional director but in spite of the objection, he was allowed to continue as additional director. According to the first applicant, there is no provision in the articles of association for the appointment of additional director. ( d )The second respondent was paid much more than what has been mentioned in the explanatory statement. In the explanatory statement, the waiver was sought only for a sum of Rs. 97,000 but the second respondent had drawn nearly a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to Mr. T.K. Seshadri, at a later point of time when the election of Mohanakrishnan came up for consideration, the first respon dent thought fit to obtain an opinion from counsel and intimated Mr. Mohanakrishnan of the requirement of the compliance of section 257. Mohanakrishnan realised the difficulty and did not pursue the matter. Since the second respondent was appointed as a director unanimously at two annual general meetings held on 4-9-1990 and 21-6-1993 by the shareholders, it escaped the attention of the first respondent of the earlier defect in the appointment on 4-9-1990. However, when it was brought to the notice of the first respondent during December 1993, the first respondent referred the matter to its legal adviser and obtained an opinion. On the basis of the legal opinion, it is noticed that there is a defect in the appointment of the second respondent as a director as a result of non-compliance with section 257 and, therefore, the first respondent informed the second respondent who in turn submitted his resignation on 23-2-1994. The board of directors thought fit that the service of the second respondent was necessary and since the violation was of a techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u N.G. Manavalan be and is hereby appointed as director of the company".' 'Item No. 8 : To consider and if thought fit, to pass, with or without modification the following resolution as an ordinary resolution: "Resolved that the recovery of a sum of Rs. 97,320 paid/payable as remuneration and sitting fees to Thiru N.G. Manavalan (the details of which are set out in the explanatory statement), director of the company for the period from 4th September, 1990 to 23rd February, 1994, be and is hereby waived subject to the waiver being approved by the Central Government".' The first respondent has furnished an explanatory statement under section 173(2) of the Act for both the items : "Item No. 7- Thiru N.G. Manavalan was appointed as additional director of the company with effect from 23rd February, 1994. According to the provisions of section 260 of the Companies Act, 1956, Thiru N.G. Manavalan will be holding office until the conclusion of this annual general meeting. Notice under section 257 of the Companies Act, 1956, together with deposit of Rs. 500 has been received by the company from a member signifying his intention to propose the candidature of Thiru N.G. Manavalan a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is interested in the above resolution. 18. According to Mr T.K. Seshadri, on the date of the said allegation the applicants sought for a declaration that the notice dated 29-8-1994 issued by the first respondent of the proposed annual general meeting scheduled to be held on 4-8-1994. In relation to Item Nos. 7 and 8 is illegal and void and for consequential permanent injunction restraining the first respondent from in any manner considering the subjects, viz,, Item Nos. 7 and 8 of the notice dated 29-6-1994 issued of the annual general meeting scheduled to be held on 4-8-1994. In the injunction application, the applicants sought for an interim injunction restraining the first respondent from in any way considering those items in the meeting scheduled to be held on 4-8-1994. When the application came up for consideration before this Court on 3-8-1994 the first respondent took notice. On the same day, I passed an order permitting the first respondent to transact the business mentioned in Item Nos. 7 and 8. But, I made it clear that if resolutions are passed, the same should not be given effect to until the disposal of the injunction application. Subsequently, the first responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent rendered to the first respondent. The said statement would amount to canvass the support of the second respondent by the first respondent. The above is the objection in relation to the explanatory statement for Item Nos. 7 and 8. The applicants have not stated as to what is the provision of law under which the first respondent shall be entitled to waive. The explanatory statement would not also mention about the additional sum of rupees one lakh paid to the second respondent. The explanatory statement, according to the applicants, should have mentioned that all the sums of money paid to the second respondent are recoverable and the director should be personally liable for the said amount. It is stated by the applicants that the object of the first respondent proposing the subject without proper disclosure is to get through the subject with the mala fide intention of conferring special benefit to the second respondent and to cover up the illegality. 21. In the above background, I shall now consider point ( a ) raised by Mr. C. Harikrishnan. His objection is that the explanatory statement does not satisfy the requirements of section 173(2). Section 173(2) is extracted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the notice must specify the business to be done. The object of the notice was to be a fair notice, intelligible to the minds of the ordinary man, the class of men who were the shareholders in the company and to whom it was addressed. In the above Calcutta case, the Bench took note of the director's report also along with the facts set out in the explanatory statement and found that the material facts necessary for the purpose of the proposed resolution were given in the explanatory statement. The Bench has further held that it is not the function of the explanatory statement to travel beyond the proposed resolution. It is then stated by the Bench that material facts have to be given but not detailed particulars. 24. Mr. T.K. Seshadri also referred to the following decisions with regard to the proposition that material facts are facts which are relevant to the resolution and not detailed particulars to be given - Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 (SC) at p. 553, Firestone Tyre Rubber Co. v . Synthetics Chemicals Ltd. [1971]41Comp.Cas.377 (Bom.), Sitaram Jaipuria v. Banwarilal Jaipuria AIR 1972 Cal. 105 at pp. 114 and 115, Escort Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as to the appointment of the second respondent as a director. The other objection with regard to Item No. 7 is that the company has mentioned about the experience of the second respondent as a director of a mutual benefit society and his appointment will benefit the society. These are the additional facts which will go to the root of the matter. The material fact as to why this resolution is coming up for consideration is mentioned. The reference to the first respondent's views on Mohanakrishnan and the legal advice given are irrelevant and not material facts. With regard to item No. 8, material facts were given, namely, how the appointment of the second respondent has become defective and how he drew remuneration as a director of the first respondent, and since this appointment is defective, the first respondent is seeking the approval of the shareholders to waive the recovery. These are all the material facts which are relevant for the resolution. It is urged that the applicants who attended the annual general meeting did not participate in the deliberations when Item Nos. 7 and 8 are placed before the shareholders for consideration. The applicants claim to have knowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply. This has been made very clear in article 2 of the articles of association of the first respondent. Therefore, the co-option of the second respondent is invalid. Even section 290 cannot come to the rescue as the defect was known to the first respondent, and notwithstanding the same, payments were made deliberately. Therefore, it is a payment made to an unauthorised person and there is no power in the memorandum or articles of association of the first respondent enabling such payment. As there is no power to make an unauthorised payment, a resolution to that effect will have no meaning and, therefore, the resolution was defective even from the inception and cannot be placed before the general body. In reply to the above, Mr. T. K. Seshadri contended that the said objection is unsustainable for the reason that the remuneration sought to be paid is for the services rendered. It is on the basis of section 72 of the Contract Act, 1872 as the service rendered by the second respondent is not gratuitous. Section 290 provides that all the acts of the director, whose appointment is found to be defective, till the defect is shown to him, are valid. I am, therefore, of the view, that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen there were no proposers and, therefore, the entire procedure adopted in the meeting was wrong. Both factually and legally the first respondent cannot rely on the minutes produced, which must have been concocted subsequently and they do not reflect what actually transpired in the meeting. Therefore, he would very strongly urge that no reliance can be placed on the minutes. According to him, the letter of the first applicant annexed to the reply affidavit makes it clear. At any rate, in view of the fact that the resolutions suffer from infirmities, however much they may be confirmed by the general body, they have no legal effect and, therefore, the Court should not permit the first respondent to implement the resolutions. 26. As pointed out earlier, the first respondent has filed a detailed counter-affidavit which has already been summarised by me in paragraphs supra. According to Mr. C. Harikrishnan, the decisions cited by Mr. T.K. Seshadri will have to be understood on the facts arising in each case. None of the decisions held that a meeting could go on with a defective and misleading explanatory statement as in the present case. The adequacy of an explanatory statement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny prima facie case whatever. 28. The balance of convenience also lies in favour of the respondents. The Central Government have also considered the request made by the first respondent and ordered waiver of recovery, which was paid to the second respondent as a remuneration subject to the approval of the general body as required by sub-section (2) of section 309. So, it is for the shareholders to consider whether the recovery should be made or the recovery should not be made and it is the internal management of the first respondent. The board of directors have also approved and passed the resolution. As rightly pointed out by Mr. T.K. Seshadri, if the resolution passed by the majority of shareholders is not given effect to, great prejudice would be caused to the second respondent, who was validly elected as a director at the annual general meeting, where the majority of shareholders have approved of his appointment. However, I have rendered the above finding on a prima facie consideration of the materials placed before me by both sides. This will not in any way affect the trial of the suit. 29. For the foregoing reasons, Application No. 5055 of 1994 is allowed and O A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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